Business Debt in a Sole Proprietorship

Business debt mixed with our personal finances

DFA Reader Micki asked:

How should we begin to address this financial debt? How do we untangle our personal/business debt and does it even matter since our business is a sole proprietorship? (I have worked outside the business to earn extra money, but my absence cripples the business even more.)

Here is an explanation of their detailed situation:

I have been married for 20 years and have 3 teenage children. My husband, Ron and I own a small wholesale business and have done so for about 15 years. My husband initially started the business, and I took care of bookkeeping. As Ron discussed the venture with his father, Bill, he was encouraged to allow Bill to “help” him; So, because the two had a strong relationship, Ron agreed. Bill took over all finances while Ron was responsible for all sales and customer/vendor relationships and activities. I had entered all invoices and bills into the computer. Bill had never used a computer and refused to do so, therefore, all financial records were kept in his home and all bills and payments sent there as well. My mother-in-law entered all receipts, bills, and taxes. Any time questions arose about the finances, we were assured things were handled and that was Bill’s job. We eventually conceded control. We knew the sales numbers and monthly expenditures and felt confident in our business stability. The business grew quickly and was very profitable. At this point, Bill encouraged Ron to take on a partner who agreed to invest capital in return for a percentage of profits. Trusting his father’s advice, Ron agreed. Terms were agreed upon including a set draw for Bill and commissions for Ron. We spent months developing relationships with vendors that resulted in a preliminary agreement for importation and exclusive rights to inventory. After a short time, Bill realized that Ron’s income was increasing and became dissatisfied with the plan, so, instead of renegotiating the agreement, Bill began paying himself bonuses and selling merchandise to his “friends” under the table and pocketing the money. Our business began losing inventory by the thousands each quarter. The financial partner discovered the inconsistencies and insisted on immediate full return of his investment or face legal action. We paid this from our personal accounts, since Bill insisted there was no other way. Then Ron entered the office one afternoon to hear his father berating our importer for his lack of English skills and culture. He insulted the vendor’s daughter to whom we were personally close and whose wedding my husband had attended and explained that our company had no need of their involvement. The relationship was irreparably severed. Gradually, Ron’s time at the office was increasingly spent arriving late, taking long lunches, napping at his desk, then leaving early. Soon thereafter, I was involved in a severe automobile accident and was unable to work for a couple of months. When I returned, I found things even more unsettling. I overheard my father-in-law on the phone discussing business credit card payments to our vendors, and when I inquired as to the details, I was told it was not my business. Bill was handling the finances. This was the “final straw”. After many years of his promises to retire and leave the company to us, he again gave a date of his departure, and, on that day, we held him to it. He was enraged. He threatened to bankrupt us and said personal things I never imagined a father could say to his son. Upon his leaving he brought bills that we were now responsible for assuring us he would bankrupt our business if we held him responsible for any debt. We were hundreds of thousands in credit card debt. He had apparently forged Ron’s name on some documentation and, on others, had simply claimed full decision-making ability. Ron refused to hold Bill legally responsible or to claim bankruptcy on moral grounds, and we have since been tortured month after month with the magnitude of the debt with which we have been saddled. We continue to pay the bills on time, even those that are in Bill’s name, and his credit has been bolstered as a result. We struggle daily to “rob Peter to pay Paul”. The situation has, over three years time, broken us and nearly our marriage. Initially we were able to begin recovery and advanced repayment of the debts. Then the economy failed. Our business was in the direct line of losses, and customer bankruptcies hit us hard. I am responsible for all finances now, and it is overwhelming. Ron cannot reason with the situation and refuses to talk it through. He did make the decision to use all our available personal credit to shore up the business. We had previously made the decision not to carry any revolving debt. He has cut off all friendships and relationships and looks to me to be his strength. I am at the end. We take full responsibility for our failure to adamantly address the financial questions with his father. We are now paying the price for that mistake. We have forgiven Bill. It remains difficult, however, each month as we see Ron’s parents brandishing new purchases as we struggle to meet minimal obligations and upcoming college expenses. So I guess we are in the process of continual forgiveness.

Business debt, personal finance, and family partnerships

Unfortunately, there is no way to “untangle” your debt from the business. You say it is a sole-proprietorship, although to me it appears to be a partnership, both of which leave the proprietors/partners personally liable for business debt, unless they are incorporated. How to address this debt is more complicated. It is one thing to acknowledge that money is owed, in this case, it will be figuring out what to do about it that will be tricky.

The first thing that strikes me about this situation is how far back the problem goes. You say you have had this business (and these financial problems) for 15 years. Any situation that long in the making will not be fixed quickly. However, decisions must be made and a course set to correct the situation, or you may eventually find yourself in bankruptcy. You say that until recently the two of you did not carry revolving debt, so you know how to handle money, but there may be no realistic way for you to support your business and finance your father-in-laws debts.

Your story is the perfect example of why people should be careful with whom and how they conduct business. Reluctance to confront family members when they do something wrong often makes a bad situation worse. This appears to have been the case here, and I think the first step to dealing with your situation is to be honest with yourself about your father-in-law’s actions. He robbed you and your husband when he paid himself more than was agreed upon and stole the merchandise he sold off the books.

It is one thing to admit that your father-in-law stole from you, quite another to decide what to do about it. I understand your husband’s reluctance to take legal action against his father, however I believe it is misguided. While the Bible does say we are not to take Christian brothers to court, in context that is an injunction against civil disputes. You are dealing with criminal actions, and I see nothing immoral about pursuing legal action in this case, especially if your father will not do right by you after speaking with church leadership about the situation.

I would recommend meeting with an attorney to discuss options. Once you have a good idea of what is open to you, you will be able to decide what you want to do. It sounds to me like your-father-in-law was a full partner in the business, which would make him equally liable for business debt. Even if you pursue no other legal action, at the very least, I would not make any more payments on anything in your father-in-law’s name, what would be the point? If they are his debts, he should pay them, and you gain nothing by paying them for him. Let the collectors come knocking on his door. His threat to bankrupt you if you send him his bills rings hollow.

Finally, I would recommend that the two of you reconnect with your church, other family, and friends. Meet with your pastor to discuss your struggles, especially where you are concerned about legal action against family, and how these business troubles are affecting your marriage. This type of situation is not the kind of thing you two can afford to handle on your own. You need the prayers of others, you need fellowship, and you need counsel. You need to face this challenge as a team, communicate with each other, and make decisions together. Remember that your marriage is more important than the business.

Do You Have Any Other Advice for Micki?

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If Bill is a member of a church, though it’s not commonly done now days, church discipline is another line to follow. Your father in law’s sins show him to be in a precarious situation before the Lord, and as he is unrepentant, indicates he needs to do real soul business. Matthew 18 lays it out. One on one, two on one, then to the church. This is the usual order and looks like what you’ve already done. He can then be reproved privately by the elders, then reproved publically, then refused the Lord’s supper, then excommunicated (declared as far as anyone can tell because of his lack of repentance that he is not really a believer). I’ve seen God do great things when biblical discipline is enforced. We also have the example of David of the depths God’s mercy can go. And when the man in the Corinthian church was reproved by Paul and handed over to Satan, the Lord brought about a great heart searching and vindication of wrong. Sadly many churches are afraid to discipline. It’s in this context though, not to “get back” at him. Unless Bill turns before he comes before the judgement seat of Christ he will have nothing to say to Christ’s “Depart from Me I never knew you. You who practice lawlessness.” John’s epistles tell us a person who continues willfully in sin is not a true believer. Though you didn’t mention her, your mother in law is also part of the mix. Unless she repents she will also be held accountable. Even though Annanias sold the property, Sapphira was also complicent and paid for it.

If the Lord does not back up church disicpline, he is not one of Christ’s own. For whom the Lord loves He disciplines and scourges every son He receives.

If Bill is not a member of a church these things are still true. He has wronged your family, Christ’s sheep. It’s as if he poked God in the eye. He who touches you has touched the apple of His eye. God will not leave the guilty unpunished. As all we “own” is really a stewardship of God’s good things, he has stolen from God as well.

For them He foreknew He predestined to be conformed to the Image of His Son. God will bring spiritual good out of the situation for you. It may not be resolved in any pleasant way. But we know Christlikeness is the final end. Christ learned obedience through what He suffered. Corrie Ten Boon once commented about the back of a piece of embroidery she was working on, we see only the underside, the knots and loose ends.

If you and Ron can pray together, that would be a great help. If not then pray for him that he will fear God and not man. Seek still to be the helper suitable to him, that doesn’t mean to be a doormat, but to do him good. And like the woman before the unjust judge pray for God’s vindication of wrong. Anger and bitterness will nag at your heels, try not to let them overtake you. If you can pray with your kids. They will be struggling with the fallout.

These may not be very comforting, and personally I’d love to fix everything for you (like the sons of Zebedee to call down fire from heaven). But having been through some rough things, I’ve realized Christ is all we have ultimately, His word and prayer are our best helps, as the Holy Spirit applies them.

Seems like a very sticky spot to be in. Any chance you can speak to your Father in Law on how this is going to affect his grandchildren. College is expensive. It’s one thing to ruin your son’s reputation, it’s another to make innocent grandchildren disadvantaged because of his actions.

I can’t believe that a father would do this to their own son. I have to wonder if your Mother in Law knows any of this has happened. If not, perhaps you should tell her. I can’t believe that any mother would allow their husband to essentially bankrupt their son.

Wow, this IS tangled! My hat is off to Micki for forgiving her father in law. I’m a believer, but I don’t know that I could–not because of what he’s done, but more because of his lack of remorse in the aftermath. We all mess up, but we have a shot at redemption by how we follow through, and he’s passing on the chance.

I agree with what’s been written about not paying on the father in law’s debts–let him bear the consequences of his actions. I’d also speak with a bankruptcy attorney and see if it’s possible to wipe the slate clean, They’ve been hit by a financial hurricane that isn’t of their own doing, and while it’s noble that they want to clean up the mess, the stress on their lives and relationships may not be worth their effort to “do the right thing”. There are some battles we don’t need to fight.

Can they fold the business and start a new one? They are, after all the ones who built it from nothing. Fold, start new and succeed, and even if the father in law seems immune from guilt, his distress at their rebirth and success will be the best justice for Micki and her husband, and the greatest punishment for her father in law.

The 30 year rate fell from 4.79 to 4.72 this week. This is the lowest point this year. The previous low was 4.78 reached two weeks ago. What is more interesting is that the all time low is 4.71 so just .01 points lower than current rates.
Looking at other rates the 15 year dropped from 4.20 to 4.17. The 5 and 1 year arms dropped from 3.94 to 3.92 (5 year arm) and 3.95 to 3.91 (1 year arm). These are all time lows since we have good tracking data for these mortgage products. So would it make sense to look at some of these other mortgage products since they are at all time lows? Personally I would still avoid the 5 and 1 year arm. Since mortgage rates in general are so low it makes sense to lock in for as long as possible. Below are rates from the weeks from May 13, 2010 to Jun 10, 2010.
Jun 10, 2010
30-fixed 4.72 15-fixed 4.17 5 ARM 3.92 1 ARM 3.91
Jun 03, 2010
30-fixed 4.79 15-fixed 4.20 5 ARM 3.94 1 ARM 3.95
May 27, 2010
30-fixed 4.78 15-fixed 4.21 5 ARM 3.97 1 ARM 3.95
May 20, 2010
30-fixed 4.84 15-fixed 4.24 5 ARM 3.91 1 ARM 4.00
May 13, 2010
30-fixed 4.93 15-fixed 4.30 5 ARM 3.95 1 ARM 4.02
Nov 26, 2009
30-fixed 4.78 15-fixed 4.29 5 ARM 4.18 1 ARM 4.35
So rates are one thing but it’s also informative to calculate mortgage payments. We took today’s rates and calculated a mortgage payment on a 200k house. We also did the same thing with rates from May, 13 2010 and rates from November,
26 2009.
Jun 10
30-year $1039.68
15-year $1496.47
5-year ARM $945.62
1-year ARM $944.48
May 13
30-year $1065.1
15-year $1509.62
5-year ARM $949.07
1-year ARM $957.13
Nov 26
30-year $1046.91
15-year $1508.6
5-year ARM $975.7
1-year ARM $995.62
So compared to a month ago a mortgage payment is $25.42 less a month for a drop of 2.45 percent. While that is not a huge drop it is considering rates from last week were already pretty low.
So what is going to happen moving forward? As always it’s hard to tell. If the economy continues to have a rocky recovery I would expect that rates will stay at current levels and possibly break down to new all time lows in the next few months. If the economy starts to rebound we should see mortgage rates move higher perhaps much higher. Over the next 6 months while it’s hard to know which way mortgage rates will move if they move up they could move up substantially while if they drop they do not have much room to fall.

My heart goes out to you and your family. No matter what you do this is an awful situation. First, it is excellent that you have forgiven him, but that is only one part of what needs to happen here. Forgiveness is more about our relationship with God, being able to set aside what a human has done so that it doesn’t eat us up inside. It has nothing to do with Bill’s responsibilities. You cannot substitute your forgiveness for the law of God or the law of man. Both require that Bill own up to what he has done and pay restitution. Your husband has no reason (outside of emotion), nor responsibility to pay for his father’s fraudulent activity. Bill stole money when he took bonuses, he stole inventory and profit when he sold business inventory to his friends, and he committed fraud when he signed Ron’s name. If this was simply a moral issue, your forgiveness and judgement would be enough, but this is a criminal issue. If the statute of limitations has run out you may have no choice but to file bankruptcy. Also, if your father-in-law at any point was a signer for the business (i.e. on checks) then he doesn’t get to say he wasn’t responsible for business debt at that time. If a receptionist signs in the company checkbook, the IRS will go after her for any debt the business had.

I am concerned that one of the reasons your husband will not file bankruptcy or hold Bill responsible is he is beating himself up instead. He may believe that he is responsible because he didn’t “catch” what was going on. The father-son relationship has what is called an inequal balance of power. Bill used his position to abuse Ron’s trust. Please tell Ron that he is only a victim IF he allows this to continue to the detriment of himself and his family. He has the choice to care for his family by holding his father responsible. If he doesn’t he is not following the scripture regarding leaving your father and mother because he is still prioritizing their financial well-being over his family’s. Try and continue to be gentle with each other. You’ve been abused enough.

Lastly, you have a witness to all of this in the investor who discovered the inconsistencies. I would find the man and get a statement from him. You may need it if this continues.

Some of the blame lies on both you and Ron for using a highly unusual and nonstandard business arrangement. In no properly managed business does the accounting department get to say “sorry, you can’t ask to see this month’s financial reports because that’s our departments AND IT IS TAKEN CARE OF.” The minute you here that is the time to demand on independent audit of the businesses’ finances. However, without control of the financial records that would be very difficult. You were both willing to deceived from the very beginning of this situation.

However, your culpability is only in allowing the situation to happen, it is not criminal.

Ron’s father, on the other hand, committed multiple criminal acts against you and Ron. He embezzled from the busines–crime one–and impersonated Ron –crime two–by forging his signature on credit card receipts–crime three. Why didn’t he use his own credit cards or his own signature? He knew what he was doing.

Both of you need to look in the mirror and realize that you are responsible for defending yourself. It is actually an act of dishonesty to lay down and take this. Either way, the family relationship is permanently damaged. Ifyou don’t stand up for yourself, you will never respect yourself or Ron’s father. If you do stand up for yourself, Ron’s father may blame you or you and Ron for his situation–but you know the truth and he does too.

Keep in mind that the debts incurred by Bill in Ron’s name are actually not Bill’s debts, and they are not Ron’s either: they are criminal acts of fraud. I imagine this is why Ron refuses to consider taking action: he doesn’t want to be the one responsible for starting the chain of events that will, in all likelihood, put his father in jail:

The inventory loss is a trickier matter and I’m not going to go into it. It would likely be the matter of a civil as opposed to a criminal suit if you had the willingness to pursue one,

Both of you are in an extremely difficult situation and I fear for your relationship. Your husband has failed to protect you from his father’s actions in any way AND he knows it. This cannot be good for his self-esteem or for your relationship., and it cannot be good for you.

I will say that my writing may sound harsh but I understand how difficult a situation you both are in–few are willing to take their own parents to court or to see them brought before a court of criminal justice. I have one friend whose father did something very similar to him in a business deal and who ate the loss. Howveever, that situation amounted more to clever dealing in a property sale than outright fraud, embezzlement, and theft.

I don’t think that living like you are living right now by accomodating your father in law’s behavior and your husband’s current response to it is really living life. It is more like existing and making do. I hope you can find a way to live according to the truth of this situation. You do not deserve this situation and I encourage you to be willing to let the chips fall where they may and let the guilty party pay the price for his actions and let all other consequences follow as they may, because you would be acting righteously by doing so regardless of what some others may think.

This is easy for me to say because I don’t have to do it, but I feel like I should tell you what I really think and what I hope I would do if I were confronted with such a terrible reality and choice. Actually, I have had this happen in my own family so I do have some experience in the dynamic behind it. In this case it was my sibling who was the victim of financial theft by her own husband–and she refused to put her foot down or put a stop to it until much too late.

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